On Wednesday, March, the Government presented its proposal for new tax rules for the corporate sector to the Council on Legislation. The proposal includes, amongst other things, a new law introducing standard taxation of the safety reserves reported by property and casualty insurance companies.
We reported previously in Tax matters that the Government had stated in a memorandum that they intended to present a proposal for the introduction of a standard tax on property and casualty insurance companies’ safety reserves. The proposal presented to the Council is a result of this statement in the Government’s memorandum and proposes both a temporary standard tax on the reserves and also a permanent tax.
The Government’s proposal for permanent taxation implies that a standard amount of income is to be reported as taxable. This standard amount of income is to be calculated on the safety reserves at the beginning of the income year multiplied by the government borrowing rate at the end of November in the year closest to the calendar year during which the income year in question ended. However, the government borrowing rate in this calculation is to be no lower than 0,5 percent.
The proposal for temporary taxation implies that a property and casualty insurance company which has a safety reserve at the beginning of the first income year after 31 December 2020 is to report an additional amount of standard income. This income is to be calculated as 6 percent of the safety reserve at the beginning of the income year in question. The standard income amount is to be reported at one sixth of the value of the reserve during the first income year and at one sixth per year during the subsequent five income years, or in the entire amount during the first income year. The reason for a temporary standard income amount being applied is that the Government also proposes a reduction in the corporate tax rate to 20.6 percent, and that the previous tax rate of 22 percent is to effectively apply to the dissolution of any provisions to safety reserves reported prior to the reduction in the corporate tax rate coming into effect.
The new regulations are expected to come into effect on 1 January 2019.
Similar taxation of safety reserves was proposed by the Corporate Taxation Committee during the summer of 2014. According to the Government’s memorandum, one reason for the introduction of this tax is to increase the fiscal neutrality between safety reserves and tax allocation reserves.
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